Hussman: Market “Extremely Overvalued, Overbought, Overbullish”

Calling the top of a market so unhinged to the upside is a total guessing game. When any market is fully unglued from fundamentals and reality, trying to guess what will snap it back into the world of simple mathematics and when that will happen is futile.

But it always happens. And one you’ve identified such overvaluation, getting out of that market always ends up having been a wise decision. Still, you’re almost always wrong before you’re right; mass delusion can continue for a long time before sanity returns. When it does, it happens suddenly and dramatically, and it’s always too late to react after the fact.

“We’re observing the very early effects of risk-aversion in a hypervalued market,” the Hussman Trust president wrote in his latest missive.

“To some extent, the actual news events are irrelevant. I certainly wouldn’t gauge market risk by monitoring the day-to-day news on potential tariffs or even prospects for rate changes by the Fed.”

For those of you feeling a bit queasy because of what Hussman describes as the “rather minimal level of volatility” we’ve seen lately, it’s time to make some changes and rebalance your portfolio with some hedges, or at least lighten up by adding cash.

“But do so knowing one thing in advance: you will experience regret,” he says. “If the market advances after you rebalance, you’ll regret having sold anything. If the market declines after you rebalance, you’ll regret not having sold more.”

The driving factor he frequently cites for the top-heavy market is that the Fed’s quantitative easing has inflated valuations to unsustainable levels, and as the free money goes away, the bottom will fall out, leaving a trail of blown-up investors.

“Investment is about valuation. Speculation is about psychology,” Hussman said. “Both factors are unfavorable here.”